tv Bloomberg Real Yield Bloomberg January 21, 2018 12:00am-12:30am EST
have 30new york city we minutes dedicated to fixed income. this "bloomberg real yield." ♪ jonathan: coming up, and pester shake up the drama and the potential for a government shutdown. the slow-motion treasury selloff continues. economists the the european central bank inching toward signaling the end of q e. we begin with a big issue. slow-motion treasury selloff. >> it could be a bond bear market, but it could be a teddy bear market than a grizzly bear market. aboutdo not need to worry
tenures getting too expensive until close to the 3%. -- 3.5%. suggests the positive effect on a tenure moving higher right now, overwhelms the potential negative affect of compression is rate hikes. >> we have been talking about this for years. the book and go out of bonds and into equities. are very good. last of they were just ok at best. rates move higher in those returns. people are actually moving in the equities and supporting the equity market. >> at some point when bond 285, perhaps to they will get to 3% in the 10 year era, i don't think so but they might, but the equity market will pick up and take some notice. i think it will be to the benefit of the bond market. >> with higher rates we think the economy will slow a bit. but spreads are tight in
corporate bonds right now. we have been de-risking. we are favoring more investment grade companies. we have been reducing our high-yield exposure. the around theng table in new york city is robert, investment strategist and jack, investment director of fixed income investment team. coming from london, the head of fundamental bond strategy. -- 263, 2 time, 26 64, this line in this day -- in the san postelection we were told was significant. how significant is it now that we have reached it? >> when you look at the u.s. economy and the trajectory in terms of inflation and the tax reform planned and potential spending and overall growth for this year, it is significant. moment isre at the the front end. you're not being paid at the
moment to take duration risks. in the concept of normalizing economy, growing economy in a synchronize growing growth, we could see it move quite a bit higher than that. jonathan: if you have looked at what has moved, basically, the motivation for the move is economics. it makes sense, not just about central banks. the nature of the move has not been aggressive, it has been gradual in slow-motion. jack: the gradual is what it will keep doing but the momentum is still there. i agree that this is driven by fundamentals. the economics, as mentioned in we will seegross, more issuance. that is a big part of it. until we have reached 3%, i aim not too worried on risk assets. i think the momentum is higher. jonathan: we caught up with hbc earlier. take a listen. upwe are not ready to tear
and reverse the views we have had in the last five years. dynamics question the we have had behind the inflation idea people have had. there is a reason for low inflation. demographics, technology, all the reasons that we discuss regularly have not suddenly gone away because we started a new year. i will do the opposite of the bearish people. jonathan: i sense that we might be in -- are we there? robert: i agree that the imentum is negative here, disagree on terms of where the value is on the curve. that is a tougher call. the market is somewhere around -- certainly below three, probably below two and three quarters. jonathan: have you been buying through the week? for us, the main thing
in terms of positioning on the treasury curve has been the shape. it haslook at the bond, not hit new yield highs this year. the performance on the back end of the curve has been solid. the front and has been repricing to take into account they have growth, a strong stock market. therefore you have a fed that is likely to keep moving. jonathan: let me come to you, the very front end of the curve, why do you see the value there? they have been short the two you're over the last year or so and is where money has been made. i think in the short-term, there is a lot of uncertainties out there. i think we are not being paid for the duration risks that you see going further down the curve. it is not only in terms of treasury, but if you look at other assets, including ige securitized assets, even inflation links. at the moment, the carrier you
are getting as much better. jonathan: does the argument resonate with you because there is a massive position that could make it portable to reprice the other way? robert: i think the spread product is attractive. i definitely agree with that. of the value in the back end the curve is difficult to judge. i have to look in a global context. percentile oflus relative value, relative to europe on the back end of our curve. the capital markets are really global. a lot of the investment flows that are the marginal pricing for the u.s. are coming from a blog -- abroad. i think that is why the back end of the curve is running out of steam and resisting the selloff of the front end. jonathan: the president of the united states is having meet -- could have a meeting with chuck
schumer. the shutdown crossing the bloomberg. does any of the government shutdown and this dysfunctional washington, d.c. story affect the way the bond market moves? with the brinkmanship, that is what it is. in the short-term it could be a waffle. the need to come to a deal. thatroblem that i have is this congress and this government is incapable of cutting spending. we know that we are going to have a larger deficit next year. whatever deals are going to come to means greater spending. that just keeps putting pressure on this. jonathan: where do you see that come -- that funding coming from? 10-year yields got to 2%. jack: i think they should be issuing at the long end. but they will keep issuing out to 3-5 years, but that is it.
that is where the pressure will stay. on then: carry on sure front end is your idea, robert? robert: i think it will be short and intermediate. i think the fed will keep a lid on the front end of the curve. there is less impact on the front end of the issuance than the back end. the back end benefiting from the discussions on the regulation, that would make it -- de rugula tion. treasuries on swap yields. they have become easier for dealers to hold. jonathan: i want to get your thoughts on what has been happening with inflation linked security. you now see it spread between 810 and 30 year go to negative. what is that mean when the spread does that when 10-year and 30 year breaks even. ? the difference in
inflation, whether the drivers are short-term and long-term. on a long-term basis there are a lot of downward pressures on prices that are likely to keep inflation under control for the foreseeable future. commodity prices have been strong and they are the biggest driver in the near-term of breakeven rates on tips. that is why you are seeing commodity prices going up, more of an adjustment on the short side. jonathan: what have you guys been doing? robert: tips have been attractive on the margin as a result of this headline inflation increase. big picture, they have been very range bound. it is definitely a tactical market where 10, 20 basis points cheaper there. commodity prices have come up in the breakevens
have wind out, it runs out of appeal. buyingn: have you been inflation protection over blackrock and you think people should continue to do so? period ofor quite a time we have had inflation linked protection. inhave taken some profits the belly of the curve, but we in the curve.ore we have reduced the marginally. jonathan: you are going to stay with me. next up on the program, the auction block. safesturns for the high-yield debt. that conversation is next. this is "bloomberg real yield." ♪
jonathan: i am in new york city, this is "bloomberg real yield." in rates,the rise investors are eating up risky debt. the first additional tier one cell at 2018 was the most popular bond with investors bidding for eight times. investor euphoria is still unshaken and the united states. orders of about 3 billion, five times the site of the offering. -- atile, a 13 billion 0.48%, the highest in 2014. it led them with their smaller share ever. everyone is back with me. robert from fixed income. jack and marilyn. that the most
popular issue in europe this week, jack, was the first issue of cocoas? people still believe that risk on is a thing. people believe in growth and that you are seeing growth throughout the world. jonathan: even with a conversation, is the ecb going to pull back? you have this tremendous resilience in credit. robert: there is a real thirst for yield. europe is is strong, strong. the ecb has been crowding out, but they have been winding down the amount that they are buying. some of the things that would indicate that they were supporting the market, where sovereign bonds were trading relative to cbs, those relations have indicated that the market is not leaning that much on the qb buying. there may be surprising resilience in the markets as we
go forward. jonathan: they do not buy financials over in europe, but the spillover has been clear. can you remain constructive on financial credits, hybrids, contingent convertibles, at a time when the ecb is set to pull back further potentially on qe and altogether this year? as the other side, there is insatiable demand for yield, particularly in the eurozone even though there is a lower rate. i think we have to be a lot more careful and selective in the names that we buy. i certainly think we have seen huge amounts of the compression. overall, the ecb does start to wind down we will see a lot more dispersion and it will be harder to find value. i think as long as you are very selective, there is still money
to be found. jonathan: are you comfortable going into the bottom of the capital structure? is not a place that we like. we like the legacies because of regulations being taken out by the bank. the old tier ones, the things that had favorable status. the banks are instead of five -- incentivized to take it out. jonathan: the federal reserve managed to hike interest rates and they experienced the loosening of financial conditions. will the president have the same luxury here, that he can remove stimulus and talk about hiking rates and still have these loose financial conditions? already the euro is up 20%. economy, like myself, i am choking, we will have to see whether that takes a bite out of growth. jonathan: we can let you get a drink.
what is the argument for a december 18 ecb departed rate hike, does one exist? is there an argument that you could get a rate hike by year-end? jack: i think it is a small argument. they really want to give time to after the purchase a stop. go on untilthem december. i think they want to see time as to how that would go about. a pressure in general because growth is stronger. i guess there is a little argument. timing is suspect. jonathan: you are close to the heart of the matter in london. there is a conversation emerging slowly that we will have a real conversation about rate hikes, even with core inflation where it is at? marilyn: i think that is the key issue. core inflation is still very low. we had disappointing dated this week. while the conversation is , you can see that the
markets will focus on not only looking at when the qe program and's, but thinking about changes to the investment policy and when there will be an increase in interest rates. i think it will take time before we start to see signals from the ecb that that will happen. even if the ecb were to finish with the asset program in that if wei agree take some time it will be next year that the ecb saw increased rates. there will be a lot of pressure for them to raise rates. the signal in september, but there will be internal pressure to stop sooner. i do not think they will do that. the trailing growth is 2.2%. with the fed that they were not hitting the inflation target, but the pressure was there to move. and stop the bond purchases. in the case of the ecb, they
have been doing massive purchases, which were not popular. they are at a negative interest rate, -40 basis points. extraordinary emergency type condition right now. the pressure will be there to stop the buying and there will that willstent core not stop until they get to zero. i am not even sure it will stop there. jonathan: some of you are coming across the bloomberg terminal. the u.s. tenure, the relationship between the two of those as the federal reserve reduced the balance sheet and the ecb takes a step back from qad. really wide. still how will that you love? -- how will that evolves? ? jack: if you look at the valuations on the european side, the german valuations argue that they are too low.
i would say that that relationship could converge. we would rather be short in and again, to the longer and of the u.s. curve, you see why there is more demand. jonathan: are you more comfortable being short in germany than in the united states? robert: there will be a convergence. the spread between the two is too wide. i think we are likely to see an increase with a safety margin. with may be lower in treasury yields. breathn: he will catches and have a drink. jack will stay with us and maryland. treasuriesis where have been to's, tens and 30's. they are up nine on a tenure notice. we take out postelection highs. from new york, still ahead, the final spread.
jonathan: this is "bloomberg real yield." it is time for the final spread. decisions from the bank of japan and the european central banks. opens on tuesday with a big highlight being president donald trump who gives a keynote speech on friday. next week you have another round of earnings. thea talks and gdp from united states. everyone is still with me. robert, jack and maryland, something we have not talked about much is credit. you mentioned it to me, is this small widening we are seeing almost across the board for the united states, is there any signal there? the markets are
digesting the fact of the budget battle, their supply and their earnings. there is a lot to work through in terms of the impact with the changes in the tax law. jonathan: broad strokes are really difficult to do. looking at a tax bill and what it means to these individual companies, are you able to establish a view on what it means at this point? jack: the peace that it really affects is the very lowest of high yields. what is interesting is the part that has rallied the most. jonathan: could also mean less duration on the index, given that tech has brought the cashback? on the margin that is a good point. they are bringing money back. that is a good thing. jonathan: we will wrap things up around the table with a rapid fire round. looking back at the last 25 minutes and trying to push things forward. individuals on markets. i will begin with the treasury
we have seen over the last couple of months. 2% on a tenure in september, all the way up to 264. of 20 basis points in the space of a couple of weeks. -- or 83% or 83% coming. coming marilyn:. marilyn:marilyn: 3% coming. coco had aeuropean tremendous year. do you bite into year and or german bonds? robert: stay with the spread product. jack: i guess i would take the coco if i have to. tough callt it is a but i go with the coco. jonathan: let's go with the federal reserve. at some time they will hike and hike again. decisions from the european central bank and the bank of japan. ecb scales back.
some conversations in japan could scaling back. who is the first a hike the boj or the ecb? uh, ecb.at, jack: ecb. marilyn: ecb. -- it has beens great to get your thoughts on the market. from new york, that is it for us. we will see you next friday. this was "bloomberg real yield." this is bloomberg tv. ♪